Tom's Blog

Pete asks the following question about his car:

Q: If I take a company owned and fully depreciated car and give it to myself personally are there tax consequences when I sell it?

A: Yes, most definitely. When you sell the car, you will have to recognize ordinary income for the full sales price of the car. The concept here is basis. You get basis in an asset when you buy it or add to it. In the case of a car, your basis typically is the full price you paid for it, including sales tax unless you took the sales tax as a separate deduction.

As you depreciate the car, the depreciation reduces your basis. So, if you fully depreciate the car, your basis is zero.

When you sell an asset, gain or loss is determined by the difference between your selling price and your basis. Since your basis is zero, the entire selling price is gain. You don't get to take capital gain on the sale because of the depreciation. This is called "recapture." Any portion of the sale that relates to the depreciation you took before is recaptured as ordinary income and taxed at your ordinary income rates.

For more about how to treat your car and other vehicles, see our course called "Maximizing Deductions of Your Dream Vehicle." You can find it along with our other tax strategy courses at http://www.wealthstrategyuproducts.com/Tax.html.

Warmest regards,

Tom

Mike from Canada, is interested in investing in the U.S. and asks a very good question.

Q: Apart from seller financing, are there other sources of financing available to foreign investors? Thanks

A: There are several sources of financing available to foreign investors in the U.S. I will admit, the easiest is seller financing. Other financing includes corporate financing. This requires you to own a business in the U.S. that establishes U.S. credit and can borrow using that credit. Another is private financing. This means going to private investors. My friend, Darren Weeks of Fast Track to Cash Flow in Edmonton, Alberta does this type of financing. Depending on the type of investing, you may also be able to get nonrecourse financing. This is financing that does not depend on the credit of the buyer but rather depends on the benefits of the real estate deal.

Warmest regards,

Tom

One of our School of Tax Strategy students from Canada asks the following question about investing in real estate in the U.S.

Q: Is it possible to engineer a rental property investment so that it has positive cash flow and zero taxable income?

A: Most definitely. In fact, if you are leveraging properly (as much leverage as possible with a rate lower than your cap rate), then you should never have taxable income from an investment in U.S. real estate even if you have positive cash flow. The reason is the high depreciation deduction (capital cost allowance) that you receive on real estate. The best thing you can do to ensure no taxable income is to do a cost segregation on the property. A cost segregation breaks down the property into four categories - 1) land 2) building 3) land improvements and 4) building contents. You need a CPA (U.S. equivalent of a CA) or an engineer to do the cost segregation.

If you are thinking of investing in real estate in the U.S., be sure to contact us at 866.467.5809 and we will be happy to share with you some thoughts about how to structure your investment and get the most tax benefits available.

Warmest regards,

Tom

My good friend, Robert Kiyosaki, recently posted an interesting opinion on the USA Today blog at http://blogs.usatoday.com/oped/2010/02/column-we-need-two-school-systems-.html#uslPageReturn. In his blog post, Robert suggests two school systems, one for entrepreneurs and one for those who wish to be employees.

The number of comments already to this post is astounding. Clearly a reflection that the public sees challenges with the current school system. Personally, I like the idea of a parallel school system for those who want to be entrepreneurs. I, for one, would have loved going to a school for entrepreneurs. My earliest memories are of business ventures my friends and I started.

For the record, I always did well in school. For the most part, an "A" student. I liked school. I'm one of those who found reading enjoyable and didn't mind listening to the teachers. I took the very traditional route of going to school, then going to college and then getting a masters degree. My family was not wealthy. I paid for my own education, including graduate school.

Still, I would have loved attending a school for entrepreneurs. I am an entrepreneur, having successfully started and run two businesses in my lifetime - a CPA firm and a financial education company. I can't say that I learned anything about building or running a company in school. I had to learn it the hard way - trial and error. And I had lots of help from good friends and mentors along the way who were encouraging and supportive and willing to take the time to teach me with no expectation of payment or reward.

One of the things I like most about Robert's idea is that the instructors would work for free. I would like to be on that faculty. Heck, I was an adjunct professor at Arizona State University for fourteen years and it was practically for free, the pay was so low. I didn't do it for the pay. In fact, I don't know of any adjunct professors who do it for the money. (Adjuncts get paid less than janitors.) We do it because we love to teach and want to share our knowledge with the students.

I, for one, applaud Robert's idea of creating a second school system. This is creative thinking and we definitely need an alternative to the current public school system. It would be ideal to overhaul the current system, but given the power of the AEA, I don't see it happening any time soon.

Let me know what you think about a school for entrepreneurs.

Warmest regards,

Tom

Scott just joined our School of Tax Strategy and has a couple of questions.

Q: Tom, new to your program, came from the Rich Dad training. going through info overload but have some initial tax questions. I have an S-corp with deferred income ($90,000) from an installment agreement when I sold the assets. I also took an equity position in the purchasing company (LLC), ($184,000) the company is effectively out of business and am wondering if the loss on the 184K will offset the $90,000 deferred income, I wont see any of the income in the future either. Second issue, I received a letter from the IRS stating I have a dependent that was claimed on another return. I dont know for sure, but it could be true, My daughter got married last October and she probably claimed herself on her and her husbands 2008 return. question, can a dependent be split between 2 returns? what is the definition of a dependent? she is 23 graduated ASU as a full time student in spring of 2008 and started working full time in aug 2008 but still lived at home through September.

A: Your first question is a little complicated to answer on a blog. In order to answer this question, I would need a lot more information. I suggest you speak to your tax advisor for this first question. If you want to know more about our personal tax advisory services, please call our office at 866.467.5809 and ask for Wendy.

Your second question is a little easier. You can’t really split a dependency exemption. Once your daughter is married and files a joint return with her husband, you can’t claim her as a dependent. If she files separately from her husband, and you provided more than half her support, you could have claimed her as a dependent. My guess is she filed that joint return with her husband so you are probably stuck.

Warmest regards,

Tom

An IRS audit may be the single biggest fear of any American taxpayer. The truth is, they can be pretty easy to handle. It’s just a matter of being prepared. Our friend, Terry, asks the following questions about preparing for an IRS audit.

Q: I have 2 question involving and IRS audit: 1. What documents, and forms should I have ready to go prior to the audit? 2. Who should I take to the Audit with me, Tax Attorney, Tax Preparer, both or some one else entirely. I am not in the process of getting audited but should it happen I would want to be fore armed. I remember you said the less work they auditor has to do the easier on you they are.

A: The two most important documents you should have ready for an IRS audit are a really good, clean and accurate set of bookkeeping records and a complete corporate book. For more about preparing for an IRS audit, go to www.provisionwealth.com/products and click on our Tax Strategy Prodcuts box. Then, go to our product called, “Managing Your Corporate Formalities” and our other product called, “Preparing for an Audit.”

As for who to take with you to the audit. NOBODY. Not even yourself. You should never go to an audit. Instead, send your tax advisor. Let him handle your audit for you. It will reduce your stress and he should be able to get a much better result than you do. For many of ProVision’s clients, we even offer an Audit Defense Plan so you don’t have to pay us for handling the audit. We only do this for clients for whom we prepared the tax return. For more information about our Audit Defense Plan, call us toll free at 866.467.5809.

Warmest regards,

Tom

Tanya asks a really good question about using multiple companies:

Q: I "own" an S corp but also own a business providing bookkeeping, etc. to other businesses. Would having the support company provide the services I would normally provide to the S corp be beneficial in any way?

A: Definitely – in the right circumstance. Remember that all tax planning depends on the facts and circumstances (i.e., what’s going on). Let’s say that your net income from your S corporation is substantial so that you are in a 35% tax bracket. Let’s say your net income from your bookkeeping service is only about $25,000. You could put your bookkeeping service into a C corporation and get some serious tax benefits.

C corporations normally are taxed at 15% on the first $50,000 of net income. So in this case, you would save $10,000 by using a C corporation for your bookkeeping business if you could get $50,000 of income into the company. Since you only have $25,000 of outside income, charging your S corporation for bookkeeping services would increase the tax savings in your C corporation.

One little caveat. Personal service corporations don’t get a 15% tax bracket. Personal service includes accounting. It’s an interesting question whether bookkeeping and accounting are the same thing. If you don’t want to take this risk, you might look at some other services that you could provide to your S corporation to take advantage of the 15% bracket in your C corporation.

For more on how to use C corporations, go to www.provisionwealth.com/products and click on our Tax Strategy Products box. Then, go to our product called, “Making the Most of Your C Corporation.”

Warmest regards,

Tom

In yesterday’s blog, I answered Sam’s question about whether to use an LLC or an S corporation for his operating company. Sam has a couple of more questions about setting up his company. The answers could prove useful to many of our readers.

Q: I am beginning training in Robert Kiyosaki's Rich Dad courses in Wholesale Buying in real estate, Lease Options, and Short Sales. What would be the purpose I should put onto the Corporation Application? Would the purpose be simply "To Conduct Real Estate Services for Profit"?

A: The purpose you are suggesting is fine. Or, you might simply say, “Real Estate.” The state asks for the purpose of the business because they will publish that purpose to the world. What do you want the world to think? You want it to be broad enough to cover whatever you might do or you might want to narrow it if your LLC is only going to be used for a very specific purpose.

Q: What do you charge for performing the paperwork for my application for an LLC or an S Corporation? I am a resident of Ohio.

A: While we are happy to do the paperwork to make your S corporation election (the form 2553), I suggest you use an attorney for the LLC or go to www.llc.com. This is a great website with terrific customer service. If you have more than one owner, I strongly suggest you use an attorney to create an operating agreement for your LLC.

Q: Is there a website where I can check to determine whether a particular corporation name is available?

A: Your state website is the logical choice for finding out whether the name you have chosen is available. I would also suggest you go to www.godaddy.com or another URL reservation website to make sure the URL is available if you are planning to have a website for your business.

You can call our office toll free at 866.467.5809 if you would like more information about the price and extent of our services.

Warmest regards,

Tom

Sam asks the following question:

Q: I live in Ohio and would like to know whether I should set up an LLC or an S Corporation. I am beginning to take courses sponsored by Robert Kiyosaki's Rich Dad in real estate. My first courses will be Wholesale Buying in real estate and Lease Options. Later, I would like to take courses in Short Sales and Creative Financing. It appears that an LLC would be better for me than an S Corporation for better asset protection and might be better for other reasons. Since I am an Ohio resident, would you recommend that I incorporate with an LLC? Thanks.

A: I need a little more information before I can answer this question. What are you going to do with the real estate when you buy it? Are you going to resell it or hold it for investment? If you are going to hold it for investment, you definitely DO NOT want to use an S corporation. If, as I suspect, you are going to immediately resell the property, then you want to be formed as an LLC TAXED as an S corporation.

LLC’s have the asset protection advantage of a charging order. For more on charging orders and asset protection, go to our ProVision products page at www.provisionwealth/products, click on Tax Strategy Products, and go to our product entitled, “What You Really Need to Know About Asset Protection.”

You have a choice how to tax your LLC. You can tax it as a sole proprietorship, a partnership (if there are two or more owners) or a corporation. So, you can elect to tax your LLC as an S corporation. Make this election by filing form 2553 with the IRS. S corporations are particularly good for operating companies that only have a few owners. For more about what company to use in your business, go to www.provisionwealth/products, click on Tax Strategy Prodcuts, and go to our product entitled, “Entity Fundamentals.”

Warmest regards,

Tom

We had a great discussion last night about how to pay for your child's education and take all of the tax benefits available to you. We discussed the Hope Credit, the Lifetime Learning Credit, the American Opportunity Tax Credit, the education expense deduction, student interest deduction, Coverdell IRA and a host of other more creative methods to pay for your child's education with tax-free dollars.

During our discussion, a question came up that I was unable to answer. So, this morning I researched it and came up with a really interesting answer that could benefit a lot of people.

Q: Am I allowed to take both the tuition and fee deduction and the student loan interest deduction?

A: Yes. You are allowed to take up to $4,000 of qualified expenses for higher education and up to $2,500 of loan interest as deductions on the front page of your tax return. Where this is deducted, as we discussed last night, is really important. Because these are adjustments to gross income on page 1 of your 1040, they will decrease your AGI (adjusted gross income) and could allow you to take other tax benefits such as the deduction for rental real estate losses.

For more information on the best and most creative ways to pay for your or your child's education, go to the School of Tax Strategy page on our website at http://www.provisionwealth.com/products.

Warmest regards,

Tom